India Microfinance

RBI paper on New Banking Licenses creates Euphoria in Markets

NBFC stocks climb higher on Banking License Euphoria

Shares of select non-banking financial companies (NBFCs) rose between two to four per cent on Thursday, after the Reserve Bank of India (RBI) released a discussion paper on entry of new private sector banks.

RBI’s view on NBFC conversions is raising some interesting questions. NBFCs do play a very strategic role and they should continue to do so. But it seems RBI wants those that get licences to promote new banks, rather than convert.

The Reserve Bank of India is considering a 50 per cent cap on foreign investment in new banks with a 10-year lock-in and keeping out corporate groups involved in real estate business.

Banks are now allowed to have up to 74 per cent foreign shareholding, of which 49 per cent can be held by foreign institutional investors and 24 per cent by non-resident Indians. The government treats banks with more than 50 per cent foreign shareholding as non-resident-owned banks.

RBI not in favour of Banking Licenses for groups with real estate interests

With the Reserve Bank of India (RBI) proposing that industrial groups or non-banking finance companies (NBFCs) with interest in real estate not be given banking licences, firms like Indiabulls Financial Services and Dewan Housing Finance Ltd (DHFL) might be out of the reckoning.

“Industrial and business houses engaged in real estate activities either directly or indirectly should not be allowed to promote banks; given the sensitivity of the real estate sector, any sub-version of the Chinese walls between the bank and the rest of the group could have extremely negative consequences for financial stability,” RBI said in a discussion paper on entry of new banks in the private sector.